To Appraise or Not to Appraise?

Posted
by
on Tuesday, June 8th, 2010 at 3:14pm.

Every
house for sale in today’s real estate market must be sold twice. First,
you must find a buyer ready, willing and able to purchase the home.
Second, you must sell the value of that house to a bank so they will
agree to lend money based on the negotiated price. The second sale may
be more difficult than the first in the current lending environment.

A mortgage is necessary in the vast majority of real estate
transactions in this country. The buyer puts a certain amount of money
‘down’ and then borrows the remaining balance from a lending
institution. The lending institution then issues a mortgage to the
buyer using the house as collateral. In order to establish the value of
the house (collateral), the bank will send out an appraiser. The
appraiser will inspect the home; do research on the homes like it that
have recently sold in the area and report back to the bank whatever it
deems to be the value of the house. The bank must feel comfortable that
the value is strong enough to justify using the home as collateral for
the loan.

The appraisal process can be much more difficult in the current environment than it has been in the past for two reasons:

1.) More mortgages are becoming delinquent.

The value of the collateral has always been important. The other
major consideration of the bank when making a loan was the borrowers’
previous credit history. If the borrower could show a history of always
paying their bills on time, the bank would have less concern about
having to take the home back in a potential foreclosure action for
non-payment. The collateral would then be less of an issue in the
bank’s mind.

The number of people defaulting on their mortgage payments is currently
ten times greater than historical levels. Some borrowers are even ‘walking away’
from their mortgage obligation even if they have the financial
resources to pay. There is currently a greater chance that the bank
will have to foreclose on a loan. That makes the appraised value of the
home (the collateral behind the loan) more important. We have seen
banks become more conservative with appraisals because of this.

2.) The ‘mix’ of homes used to establish value has changed.

There were very few distressed property sales (foreclosure or short
sales) five years ago. Distressed properties make up over twenty five
percent of all homes sold today. The homes used as comparables by
appraisers to establish value today reflect this change. More and more
distressed properties are entering the ‘mix’ of properties being used
as comparables. The distressed properties sell for less. The result is
lowered appraisal values when they are used as comparables.

Should an appraiser even consider distressed properties when
establishing the value of a non-distressed property? There is much
debate on this issue. We must realize that the reason the bank is doing
an appraisal in the first place is to protect the loan they are making
to the borrower. The house is the collateral to that loan. If the
borrower fails to make payments, what will the bank be left with – A
FORECLOSURE! With that in mind, the bank can make a reasonable argument
that distressed properties should be considered.

What does this mean to you?

If you are a buyer…

Realize that only you know what the true value of the home
is to you and your family.
You have probably shopped online and seen 100’s of homes. You then
picked out the ones you thought were best and visited them. You went
into every room and saw every amenity. After scrutinizing all these
homes, you picked out the one that best fit the needs and goals of your
family. You agreed on what you believed to be a fair price. Don’t
allow the appraisal to convince you that you were wrong. The report was
done in just a few days (or even hours) and was completed to satisfy
the banks current need to be conservative.

Be willing to revisit the price of the home and see whether the difference can somehow be negotiated.

If you are the seller…

Realize you are selling your house at a time when banks are being
conservative on values. If your appraisal does not come in, do not be
quick to ‘kill the deal’. There is no guarantee that you will find
another purchaser. There is no guarantee that a new buyer will match
the offer the previous buyers made and, even if they do, there is no
guarantee that you won’t have the same challenge with a new appraisal.

Think hard and long and see if perhaps you can re-negotiate a deal that both you and the buyer can live with.

1 Response to "To Appraise or Not to Appraise?"

The Woodlands Real Estate wrote:
As a state certified appraiser myselft, I can tell you that an appraiser is not supposed to use distressed sells. If the bank is asking for a "market value" we usually base this on a 3-6 month exposure time. Distressed sales are priced to move faster than this and aren't used in the valuation. I some circumstances foreclosures are the only thing that is moving in the market area and then the appraiser might have to use them. But as long as there are recent/comparable "arms length" transactions then these are the sales that should be utilized. Posted on Wednesday, August 25th, 2010 at 6:40pm.